Monday, February 27, 2012

Radio Interview 2/25/2012: Greek Bailout, Europe, and Federal Reserve QE3

We were interviewed on Saturday Session with Bishop about Greece and the proposed bailout and how it forces Greece to relinquish its sovereignty.  The details of the proposed bailout, which would include new restrictive laws, more pension reductions and spending cuts, the prohibition against any Greek political action contrary to the bailout, and the requirement to make debt payments before any public spending in Greece would be allowed, and the need for resolution prior to March 20th, which is the date on which Greece must pay maturing debt.  Greece is already in technical default.  We discussed the imposed austerity programs and how they are making Greece's economy even more unsustainable.  We discussed how Greece will inevitably face the choice of default within the euro or default with abandonment of the euro which is a choice between economic slavery as a colony of the eurozone (Germany) with foreign EU/ECB technocrats running the Greek government or the harsh new beginning of freedom with a new sovereign currency which could devalue up to 80% after a fixed exchange from the euro to the new currency and the redenomination of  all Greek public and private debt into the new currency and the possibility of economic growth.

While it may appear that the United States has decoupled from the developing storm of Europe, the consequences of a currency union without a fiscal transfer mechanism, recession in Europe, eventual Greek default, and the pressure on European banks and other eurozone peripheral countries will have global consequences on financial liquidity and the world economy including the United states and China.

We also went over the minutes of the last Federal Reserve Open Market Committee (FOMC) meeting in which most members are not inclined to initiate a QE3 unless disinflation reasserts itself and economic growth weakens in the future.

An MP3 of the interview is here.  The European situation and the tragedy of Greece have been unfolding in very predictable and obvious fashion for a few months.  Even Wolfgang Munchau has finally acknowledged that Greece needs to default.

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Wednesday, December 14, 2011

Recession, Recession, Recession?

Last week, Lakshman Acthulan of ECRI gave an interview in which he discussed the slow growth in the United States and how economic indicators show we are heading for recession if we are not already in recession.

Watch the interview here.

John Hussman asked last week if we have avoided recession and he found little evidence of any meaningful reduction in recession risks and underlying recessionary pressures are unchanged.

Last week, Jeremy Grantham decried the lack of growth in the United States as a lack of political will to provide jobs, to repair infrastructure, to stop the declining effectiveness of education and training, and government's unwillingness to confront long term issues as well as the drastic decline in income equality.  The negative is overwhelming the positive and it is not only framing attitudes, but it has substantially restructured the middle class according to Dan Little and has created a much larger class of unemployed than the official figures, because they are not counted and no longer exist for statistical purposes.

Given the recession in Europe, much less the growing economic crisis in which Europeans think fiscal union is balancing budgets and punishing deficit countries rather than having a common Treasury with taxing powers which enables a proper fiscal transfer mechanism which is economically necessary in any successful currency union and in which Europeans think eurobonds are shared liabilities rather than an issuance of a common Treasury with taxing powers, and the slowing growth in China, recession risks are emerging globally and the an implosion in Europe could drive the world into a depression.


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Monday, December 12, 2011

Blogging, Clients, and the Impending European Implosion

In the first week of October, it became obvious that what needed to be done in Europe to avoid a financial crisis which will become a global financial crisis will not only not be done -- it is being ignored and economic history denied in immoveable Orwellian terms.  The EU Summit was a colossal failure and, despite media reports to the contrary, nine countries, other than the UK which opposes the Treaty changes, must consult their parliaments and Ireland may need to seek public approval.  Since the euro has never survived a public vote, it will be interesting to see to what extent the EU will go to suppress any public vote in Ireland or elsewhere as it did in Greece prior to staging its coup d'etat and deposing the democratically elected government of Greece.

To hear more of my analysis, including my concern that the euro has become an enemy of democracy, of the European economic crisis, listen to my most recent radio interview here.

It became my duty to serve my consulting and advisory clients to get them to position themselves appropriately consistent with their business model and to rebalance individual portfolios defensively.   Anyone who has not taken by advice or implemented my advice: Good Luck.  Desired results require decisive and informed action.

Consequently, I have not been blogging despite have several large articles researched which I have not had the time to write.  I would like to write everyday.  However, I do not like to write just to write but when I have something substantive to say.  What little advertising is on this blog site is obvious and minimal.  The links --- all links --- within my blogs are substantive sources and often offer different views.  No links within my blogs are advertising, which I find a repugnant practice.  Blogging is not about making money; it is about ideas and communication and discussion.  Other bloggers, not all, have found my practice of link referencing sources, much as academic papers would be referenced, and providing extended reading material through those links as impediments to cross publication.  On the other hand, individual opinions without substantiation seldom rise to Proustian levels. It also means I do not close my mind to different viewpoints and attempt to remain true to the data and the developing macroeconomic environment.  I have never been a joiner of cliques and have been schooled in critical thinking in which no one's opinions, including my own, are sacrosanct.  If this offends others, so be it.


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Saturday, December 10, 2011

Europe & Its Danger to the Global Economy

In a 12/3/2011 radio appearance on Saturday Session with Bishop, I discussed how serious the economic situation is in Europe and the potential consequences the current economic and political policies of the eurozone could have for Europe, the U.S., and the world.

Listen to it here.  There is a Bernanke news lead in to the actual interview.


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Sunday, October 30, 2011

Is the Euro Steeped in Self-Deception and Suicidal Delusion?

After only one day, the Euro Deal of the recent EU Summit began to wilt under the bright heat of the flood lights of rational scrutiny.  On Day 2, we saw a repetition of how the German Constitution is a fundamental stumbling block to a politically united eurozone fiscal union with additional pleadings which could force Bundestag approval of EFSF bond purchases (not the bond purchase program but the actual individual purchases themselves).

We also saw on Day 2 the Erste Group bank of Austria suddenly writedown its CDS portfolio by 1.49 billion euro creating a a 750 million euro shortfall just two weeks after projecting a profit and reducing its 2010 profit 12%.  It reduced its CDS portfolio to 300 million euro yesterday from 5.2 billion euro as of the end of September.  It also announced it was cancelling its repayment of 1.2 billion euro in State aid, while proclaiming it had no intention of requesting new State aid as it would cover the loss with a 35% (only) return of executive bonuses and the use of retained earnings over the next three quarters.  It should be noted that the Erste Group had substantial exposure to Eastern Europe as do Greek bank Subsidiaries in Eastern Europe.

Worse, not only is Sarkozy seeking China's investment in EFSF bonds or the SPV to be created (Van Rompuy is on record from earlier in the year favoring consideration of Chinese investment), but Klaus Regling, the executive director of the EFSF, was not only already talking with the Chinese but even suggesting that EFSF debt could be issued in Yuan.  It is economically incompetent for a sovereign nation with its own fiat currency to issue debt denominated in a foreign currency.  For a monetary union with no fiscal transfer mechanism to issue debt in a foreign currency (Yuan), when its member nations are under credit attack for debt already denominated in a foreign currency (euro), is beyond incompetent; it is economically suicidal.

The surplus countries of the eurozone have the money to invest in the deficit countries; there is no need for foreign investment in eurozone debt which will cause the euro to be sold and dollars purchased by the eurozone countries which will strengthen the euro and make eurozone exports more expensive.  The surplus eurozone countries, in order to economically correct trade imbalances within the eurozone, should be using the current account surplus funds to invest in the infrastructure and manufacturing of the deficit countries. The Euro Deal of this past week has not increased the equity stake of member nations; it only has the member nations providing insurance guarantees

The one size fits all approach of the eurozone just does not work.  The deficit countries cannot export and privatize their way into surplus under austerity.  The current account surpluses needed to drive down the existing high private sector leverage and public sector deficit in the deficit countries is too massive (even in Ireland) to be obtained from export growth and the privatization of public assets.

Yet, the mantra of convergence, competitiveness and austerity remain as the key mistakes enshrined as European Monetary Union holy grails carry forwarded from the EMU 1991 currency crisis.  Convergence never happened.  Kantoos Economics, a German economics blog, has had two recent posts which exemplify the group think mindset of the European Monetary Union. One was on competitiveness in which a post by Kash Monsori is used in an attempt to show how misunderstood the European concept of "competitiveness" is and that imposed austerity in the deficit countries is not a self fulfilling economic disaster. The second post on Kantoos Economics is on the "necessary" rigidity of currency unions and internal devaluation as the only method of adjustment for trade imbalances with a currency union.  If Kantoos Economics wants to take on a non-European on competitiveness, then Kantoos would be well advised to take on Rebecca Wilder who has shown the "competitiveness" concept as promulgated in the eurozone is a chimera in which all countries must be like Germany in which the concept has become to mean the efficiency of the economy as a whole involving "...strong macro-prudential policy, infrastructure, efficiency and income gains, savings, etc."  In fact, the concept of competitiveness more generally describes and reflects data from a variety of factors such as education, infrastructures, institutions, technological development, health, macroeconomic environment, market efficiency, labor efficiency, and innovation to name a few.  It is always best when theory adapts to the reality of data rather than morph data to fit a phantasmagorical theory.

When one looks at worker statistics, the Greek worker works longer hours for less money than workers in other EU countries.  However, most Greek workers are involved in agriculture and the worker productivity has a smaller euro value.  For productivity to improve, there needs to be technological improvement within Greece.  In fact if you look at the northern and southern eurozone countries, there is no evidence of profligacy and laziness.  What you will see is, the creation of the euro lead t a massive flow of capital from the northern countries to the southern countries, because it was profitable for the northern countries.  Marshall Auerback and Rob Parenteau have provided a concise and strong economic criticism of the Greek myth of profligacy and the ultimate self-destructive nature of austerity not only on the deficit countries but also on the surplus eurozone countries.  They paint a convincing picture of the need for a more coordinated mutually beneficial growth option involving direct investment by the surplus countries in the infrastructure, technological development, and manufacturing of the deficit countries.

The Australian economist, Bill Mitchell, who has been a long time critic of the euro, sees the Euro Deal as one which solves nothing, continues all of the same problems, intensifies the anti-democratic policies of the eurozone, and increases the pressure on the surplus countries to suffer the same fate as the deficit countries.

What does this leave us with?  Desperation, human suffering, failed nations, a breeding ground for authoritarian regimes, economic collapse?  Or does it leave us with an existential epiphany of NO HOPE and the recognition of a common humanity and purpose that digs down and comes up with the political will to get things done for the best interests of the many and a respect for individual freedom which promotes unbiased, empirical analysis of economic data, the needs of aggregate demand, and recognizes the economic growth power of full employment?

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Friday, October 28, 2011

Euro Deal Euphoria or Wake?

The announcement of a euro deal emerging from the EU Summit on the "debt" crisis yesterday pleased the markets, but it has solved nothing  and appears to have a 100% chance of failure.  In fact the deal only further exposes the the fundamental construction weaknesses and limits of the euro which has doomed it to failure.

How far can you kick a can down the road with a dead cat inside?  Apparently, only one day.  Italian bond yields exceeded 6% at auction today.

Auerback, Wolf, and De Grauwe, among others, have called for the ECB to step up and be a lender of last resort consistent with the role of a central bank.  Unfortunately, the ECB by Treaty construction and ECB rules and establishment is not a real central bank and does not have the independent authority to buy bonds, issue currency (the NCBs issue currency under a rigid ratio per nation with the ECB limited to 8% for clearing purposes), or provide liquidity without difficult collaterization guidelines being met.  The ECB in setting interest rates has shown an inclination to be overly concerned with headline, rather than core, inflation which has caused rates to raised at least one time to far and maintained unchanged rather than lowering rates which has primarily served Germany and France at the expense of the deficit countries.  The ECB can only buy bonds on the secondary market and only of prescribed credit quality.  In its attempts to buy bonds on a limited basis to assist in relieving credit pressure and yields, it has faced significant political opposition from surplus countries which has caused it to act as a Fiscal Enforcer and threaten and/or hold back needed liquidity to NCBs in Ireland, Greece, Portugal, and Italy to force national politicians to enact budget cuts and austerity measures despite no public support in those countries.  The role of a real central bank is monetary policy with the ability to provide liquidity, buy bonds, set interest rates, and promote monetary stability as well as act as a clearinghouse.  To get the ECB to act as a real central bank would require Treaty changes and a complete change in the rules and functions of the ECB.  There is not enough time.

Trichet has even recommended a Finance Ministry for the eurozone, but what good would a Finance Ministry have if there is no fiscal transfer mechanism, eurozone taxing authority, and relinquishment of national sovereignty by member countries?  The EU and the eurozone has suffered for too long the determination of sovereign policy in member countries by an elite which is defiant of democratic approval.

Munchau has repeatedly expressed doubts on the leveraging proposed for the EFSF and the SPV which will apparently be created.  Has everyone forgot how disastrous the big banks SPVs were going into the recent Great Financial Crisis?

Sarkozy is promoting the involvement of China when this would only worsen the economic problems as I and Tim Duy have written citing Michael Pettis.

The 50% "voluntary" haircut is not enough and it is unlikely there will be 100% private participation and 1.4 trillion euro EFSF funding is not enough, particularly if European bank's liquidity and recapitalization is eventually challenged.  Additionally, it is popular to overlook the very negative direct effect these haricuts would have on Greek banks if Greece stays in the eurozone.

Many commentators have questioned the jury-rigged euro deal's attempt to structure 50% haricuts as not a defined default triggering CDS.  In fact, in just one day, Fitch has said the 50% haircuts do constitute a default and will affect Greece's credit ratings send the euro down.

The eurozone crisis band aid approach of temporary patches is not sustainable and is just setting the stage for recession and the eternal re-emergence of the very same problems.

Is the eurozone a monetary union with a stable currency benefiting all of its members or is it a tontine in which the last remaining country becomes the Imperial power and the other countries its colonies?  Meanwhile, Greece, Ireland, Portugal, Italy, and Spain are being repeatedly raped and France has been moved to the credit rating coming attraction.


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Monday, October 24, 2011

BRICS to the Rescue? Kiss Eurozone Growth Goodbye

In September, when Michael Pettis' private newsletter discussed how destructive a BRICS rescue of the eurozone or any eurozone country by buying bonds would be, his observations and conclusions were too obvious to justify further comment.  Here is a shorter public version of the newsletter.

Bottomline, if China and Brazil were to buy sovereign bonds in the eurozone or EFSF eurobonds (if any are ever approved), it would would mean the eventual shift of financial flows to the BRICS from the eurozone stifling eurozone economic growth, because, as Pettis said, "foreign investment simply replaces domestic savings, undermines the manufacturing sector, and raises unemployment or debt."  As the BRICS bought European bonds, the Europeans would be forced to buy United States bonds, US dollars would be sold to buy euro and the euro would strengthen while trade balances would shift to the BRICS, particularly China.  This is the consequence of foreign investment.  To make matters worse, as Pettis points out, the foreign investment is not needed as Europe is awash  in capital in the surplus countries.

Yet, as the trade surplus nations of the eurozone continue to avoid the trade imbalances within the eurozone, this possible scenario is being floated as the EU Summit  draws out with France and Germany unable to agree and the UK demanding all EU countries participate.  This will only seriously aggravate the eurozone problem as, according to Pettis, "the increase in foreign investment would simply be matched either by an equivalent reduction in domestic savings or an equivalent increase in domestic debt to counteract the rise in unemployment. Rather than ease the burden, in other words, foreign investment simply replaces domestic savings, undermines the manufacturing sector, and raises unemployment or debt."

If the BRICS want to help Europe then they need to invest in infrastructure and manufacturing in the eurozone and, particularly, in the peripheral countries.

If BRICS buy eurozone peripheral sovereign nation bonds through the EFSF or individually, the eurozone can kiss economic growth goodbye and the currency problems of the euro multiply with decreased savings, increased debt, increased unemployment, and loss of trade surplus to non-eurozone countries.

As we indicated in our last post, the eurozone needs to decide if it will be a fiscal European Union or if it needs to break up. 


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Saturday, October 22, 2011

Has Germany Castrated the Euro?

The German Bundestag now has the legal authority to require the German government to submit all EU proposals which will have budgetary effect to the Bundestag for approval prior to negotiation committing Germany to any agreement.  This virtually prevents the German executive from negotiating any substantive EFSF or other economic support for the eurozone as a whole, or particular member countries, through the EU, ECB, or EFSF.

Despite early French-German discord, there was some renewed hope that a 3 trillion euro package could be put together for the EFSF only to have the German Finance minister quickly and very publicly state that no miracle cure will emerge from tomorrow's EU Summit on the eurozone's sovereign debt crisis and further stating that the process for resolution will take much longer into next year, which has again placed focus and pressures on bank credit and liquidity rather than the more centrally important issue of sovereign risk in a monetary union without any fiscal transfer mechanism.

The EU Summit tomorrow will not only be a disappointment, but it could well be the ultimate stone thrown on the victim of European union.  The 3 trillion euro package has been reduced to 2 trillion and now they are again talking of 1.3 trillion with no additional public sector haircuts beyond 50%, when it is obvious is needs to be much larger if not 80% or more, at the insistence of the ECB, although that would only amount to a 22% writedown of Greek debt and far too little money to provide bank recapitalization and sovereign credit support.  European banks alone face a potential 7 trillion loan contraction.  A conservative economic stabilization fund would need at least 10 trillion if bond buying to support sovereign credit is included to provide some (this is an off the cuff figure and would only be a temporary solution as the political problems will lengthen the process) time to politically provide either the necessary treaty changes with democratic approval for fiscal union or a planned orderly default and withdrawal of Greece from the eurozone.

Already France is being threatened with a ratings downgrade by Moody's and the S&P is warning of an EMU downgrade blitz.  European officials and economists have lost focus on the big picture in attempts to defend cherished political and economic policies which defy real economic data.  While Munchau has maintained the optimal fix would be a democratic fiscal union with the alternative an unacceptable public recapitalization of European banks, this, in my opinion, would only further the depth of sovereign risk and potentially endanger democratic rule.  Munchau has asserted that the choice will be between fiscal union or break up.  Martin Wolf has essentially agreed in the need for fiscal union as first aid will not remedy the eurozone internal balance of payments crisis which is at the heart of the euro currency crisis, as Michael Pettis has clearly described as an economic imperial and colonial relationship.

The European Commission's assessment report has been leaked which shows the total unsustainability of current program and proposals and further discloses the ECB does not agree with the private sector involvement scenarios.  The full leaked version can be found here.   As Rob Parenteau and Marshall Auerback have asserted in private email communications (of which I was a copied recipient), this document substantially documents not only the unsustainability of current programs but refutes current austerity economic polices as indefensible.  In another private email to them from Martin Wolf, he has indicated that Greece's present problem is one of economic flows, which is correct for the current situation in which Greece's debts are denominated in a foreign currency (euro) and default would gain Greece little.

However, any planned, orderly default by Greece would require an immediate take it or leave it redenomination of all Greek debt, public and private, into the new Greek currency.  This would establish an economic stock in which the economic flows are secondary as a fiat currency sovereign nation which taxes cannot become insolvent. The market would decide the haircuts and devaluation.  Most economic speculation has assumed any Greek default would be within the euro which would be suicidal sacrifice on the alter of European union on the part of the Greece, whose citizens do not appear to want to slink into the darkness of slavery quietly.

The EU Summit tomorrow will not only be a disappointment, it may well be a defining moment of existential despair.  In that despair, what choices will the different people of Europe make?

UPDATE:

Here is a post by Rob Parenteau entitled "Leaked Greek bailout document: Expansionary fiscal consolidation has failed" which can be found at Credit Writedowns here.


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Saturday, October 8, 2011

Reducing Unemployment Requires Political Will

In August, I  calculated out monthly job growth, to achieve 5% unemployed for both official unemployment rate and for the total unemployed including discouraged workers, at rates 3-4 times more than we have been experiencing for a year and they still took a significant number of years.

As another example here are two graphs and commentary from macroblog at the Federal Reserve Bank of Atlanta showing three scenarios out through 2017 using three monthly job growth rates consistent with prior months of 96,000, 110,000 (from February 2010), and 158,000 (from August 2003) which show they do not come close to achieving normal 5% unemployment.  In fact, 110,000 monthly jobs growth is approximately almost enough to keep yup with population growth.

I have discussed at least twice that the employment to population ration and the labor workforce participation ratio have been improving slightly while the number of population working or seeking work has declined despite population growth.  We risk seeing these months turning into decades

If politicians do not belly up to enact the fiscal programs necessary to get people working now -- not a year or two from now -- and get everyone working, not just a million or 1.3 million, then we are going to see recession (at best), social unrest, and the necessity to remove politicians, who have no political will to protect the public good for all of the people and just a chosen few, in order for those politicians to find another trough from which to feed.

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Friday, October 7, 2011

September 2011 Unemployment 16.5%

While September 2011 official unemployment remained unchanged at 9.1%, total unemployment, including discouraged workers, rose 3 tenths to 16.5%.  If one used the older 1994 method for calculating total unemployed, including discouraged, the number would be closer to approximately 23.2%.

Jobs edged up 103,000, but 45,000 of those were returning Verizon workers who had been on strike.  The private sector gained a net 137,000 while government continued declining by 34,000 according to the September Jobs Report.  This continues to be historically weak.  Wages earnings continued to be weak and average weekly work hours were up slightly.  Involuntary part-time workers increased to 9.27 million from 8.826 million and those unemployed more than 26 weeks increased 6.242 million from 6.034 million despite thousands falling of into statistical nothingness as extended unemployment benefits expire.

While the employment-population ratio increased to 58.3% and the Labor Force Participation Rate increased to 64.2%, both are increasing partially as the result of less people in the work force looking for work as we discussed two months ago.  This chart shows just how dramatically bad it is.


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